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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Differential analysis for a lease-or-buy decision

D’Amato Corporation is considering new equipment. The equipment can be purchased from an overseas supplier for $315,000. The freight and installation costs for the equipment are $15,000. If purchased, annual repairs and maintenance are estimated to be $12,000 per year over the four-year useful life of the equipment. Alternatively, D’Amato can lease the equipment from a domestic supplier for $95,000 per year for four years, with no additional costs. Prepare a differential analysis dated December 11 to determine whether D’Amato should lease (Alternative 1) or purchase (Alternative 2) the equipment. Hint: This is a lease-or-buy decision, which must be analyzed from the perspective of the equipment user, as opposed to the equipment owner.

a)

To determine

Differential Analysis: Differential analysis refers to the analysis of differential revenue that could be gained or differential cost that could be incurred from the available alternative options of business.

To Prepare: The differential analysis of Company DC as on December 11.

Explanation

The differential analysis of income from both alternatives is shown below.

Differential analysis for Company DC
Lease Machine (Alt. 1) or Buy Machine (Alt. 2)
December 11
Lease Machine (Alternative 1) Buy Machine (Alternative 2) Differential effect on income
Revenues $0 $0 $0
Costs:
   Purchase price $0 (-)  $315,000 (-)  $315,000
   Freight and installation

b)

To determine

To Advise: Whether the Company DC should buy or lease the machine.

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